By Somit Dasgupta

Last month (December 2, 2024), the apex court ruled in favour of the government’s intent to privatise the power distribution business in Chandigarh. The Supreme Court, in its verdict, decided not to interfere in the ruling of the High Court of Punjab and Haryana, which had upheld the decision of the government of India to privatise. The central government had announced in 2021 its plans to privatise the distribution business in all Union Territories (UTs), currently being undertaken by their respective power departments. The ball has been set in motion in all the UTs, and the first success was in Dadra and Nagar Haveli and Daman and Diu where a well-known private utility took over in 2022. In all the other UTs, the matter is being pursued, although in the case of Puducherry it has gone to litigation just like Chandigarh.

Privatisation of the power distribution business is a very old story in India, with Odisha being the first state to take this step way back in 1997, followed up by another round in 2020. After Odisha, complete privatisation across the entire geographical area of a state has only taken place in Delhi. There are, of course, some stray private utilities operating in many cities — for example, in Mumbai, Kolkata, Ahmedabad, Surat, Noida, etc. Privatisation of the distribution business has always been a very tricky problem because of the resistance it has faced, mainly from the existing employees of incumbent utilities which are all government entities. It has also been exploited for political purposes by the opposition parties in the states concerned. The employees resent it as they feel that will face adverse service conditions, including retrenchment post-privatisation. While opposing privatisation, the employees’ associations usually resort to technicalities as to why privatisation cannot proceed. In the case of Chandigarh, several issues were raised, such as the rationale for privatisation despite distribution being profitable (though this is factually incorrect), the aggregate loss levels at 13.5% being lower than the national average, the succeeding distribution company not existing before the bids (a legal requirement), or 100% privatisation not being permitted under the Electricity Act, 2003. For the record, the successful bidder in Chandigarh is a subsidiary of a well-known private utility based in Kolkata.

Privatisation has not always been beneficial, as seen in the case of Odisha after the first phase. In contrast, the case of Delhi is hailed as a success, where the loss levels have come down to a single-digit figure from being over 50% around 2002. The other private utilities too are doing well as far as loss levels are concerned, as they range from roughly 4-8%. In Delhi, it is not just the loss levels which have improved considerably, but the quality of power has also changed drastically for the better. Delhi today has distribution infrastructure that can be considered among the best in the country, all financed through retail tariff as determined by the regulator. Delhi did not receive any assistance from the government for building its infrastructure since it was a private utility. On account of privatisation, the government saved about Rs 1,200 crore annually, which it was incurring on the then Delhi Vidyut Board.

Incidentally, each case of privatisation has been a lesson for the next. In the case of Odisha, one of the primary reasons for its failure was the lack of any transitional support. Therefore, in the case of Delhi, transitional support of Rs 3,450 crore was made available to the distribution companies (discoms) over a period of five years, during which the discoms had to lower their loss levels to finance their operation. In Delhi, there was a problem of payment of pensionary benefits due to an incorrect assessment of the corpus required. This was accentuated by the voluntary retirement scheme announced by the new privatised utilities, which led to a big exodus, creating a cash-flow problem. This has ultimately resulted in a surcharge being levied on the consumers in Delhi to aid the utilities in discharging their pensionary liabilities. To take care of such problems, in the case of Chandigarh, two things have been done. The first is that the discom will be responsible for pensionary liabilities only with respect to employees on the payroll at the time of transfer, meaning that for personnel who have already retired before the transfer the government will pay their pension. Further, it has already been mentioned in the safeguards that in case of any shortfall, the discom will be able to raise additional resources through tariff.

There is an ongoing debate as to which option is better for the consumers — privatisation or retail competition? In the latter case, there will be several retailers but only one owner of the distribution wires in one geographical area. All retailers will use the same set of wires after paying the wheeling charge. The government has been toying with the idea of having competition in the retail business, and it has been trying to work out the details without much success. In the last decade, several drafts have been suggested, but the matter has not progressed because many complex issues are involved. To begin with, a big conundrum is who shall be responsible for the high loss levels — the retailer or the owner of the wires? Also, the power purchase cost is about 80% of the total cost of supply, and hence, retail price would almost be the same across retailers, thus negating any competition. This author has always maintained the view that the best option for India is to go in for privatisation and the efforts being made by the government is a step in the right direction.

The writer is senior visiting fellow, ICRIER.

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